Friday, June 26, 2015

The Many Faces of Inequality and Poverty in Australia and the World

Introduction

Inequality matters. This is the consistent finding of a
myriad of studies in recent times. Consequently, inequality has become an increasingly
important concern for policy-makers, business people and societies throughout
the world. We can attribute some of the increased interest in inequality to the
success of Thomas Piketty’s book Capital
in the Twenty-First Century. A more important factor, however, is the clear
evidence that inequality is rising in many countries throughout the world. While
Piketty’s major concern is with inequality in the developed world, it is clear
that the rise of the developing world, particularly China and India has changed
the global distribution of income and wealth. Complicating the analysis of
inequality is the fact that rapid economic growth in these two giants has seen
a massive reduction in global poverty and a small reduction in global
inequality. The big winners from the globalisation of the world economy have
been the middle classes of the developing world and the wealthy in the
developed world.

Measurement Matters

How we
measure inequality has a big impact on whether we conclude it has increased or
decreased in recent years. Mostly we measure inequality in terms of income or
wealth, but we could also consider other inequalities relating to gender, race,
access to government services, education opportunities and many others. One
important distinction that is often made is between equality of outcomes versus
equality of opportunity, although the accumulation of wealth clearly brings
with it increased opportunities. We can also contrast ‘market’ inequality with
inequality after taxation and spending by governments. The United States, for
example, has similar market inequality to other developed countries, but
redistributes less through taxes and transfers, leading to more unequal final outcomes.[1]

Inequality needs
to be distinguished from poverty. It is possible for poverty to be in decline
at the same time as inequality is on the rise. This would occur if incomes for
the poor rose above a designated poverty line, while, at the same time, incomes
for the rich increased at a greater rate.

Some writers and policy-makers contend that the focus of
policy should be poverty reduction rather than inequality. Feldstein uses the
Pareto principle, which states that that “a change is good if it makes someone
better off without making anyone else worse off.” He contends that “if the
material well-being of some individuals increases with no decrease in the
material well-being of others, that is a good thing even if it implies an increase
in measured inequality”.[2]

Such
contentions rest on the idea that poverty is an absolute concept, while
inequality is a relative one. Levels of inequality, however, shape how
we perceive poverty. What is available to a majority of citizens shapes perceptions
of deprivation and hence poverty. Poverty, even in an ‘absolute’ sense, is
‘relative’ over time and space. Poverty in Australia today is different to
what it was in the 1960s. And poverty in Australia is clearly different to
poverty in other parts of the world.

Rising inequality is a potential problem because it divides
societies and opens up the possibilities of reactionary responses to economic
and social problems as the poor increasingly support populist solutions. Some
authors argue that rising inequality leads to an erosion of trust and to
increases in anxiety and illness.[3]
The OECD argues that rising income inequality “can stifle upward social
mobility, making it harder for talented and hard-working people to get the
rewards they deserve.”[4]

One measure of inequality that receives a lot of attention
is the Gini Coefficient (GC). This measure is popular because of its simplicity
and its applicability across countries. The GC represents a scale from zero to
one, where zero represents a situation in which all households’ incomes are
equal, and one represents a situation where one household has all the income to
itself.

Australia has a higher GC (0.33) than the OECD country[5]
average (0.31). Iceland has the lowest GC (0.24), followed by Slovakia, Norway
and Denmark. Caution is required with this measure as with any other measure of
inequality. India’s GC, for example, was 0.38 making it a country of low
inequality of income. This means that in India, despite some spectacularly
wealthy people and a growing middle class, most
people are poor and therefore relatively equal!

Other ways of measuring inequality include comparing the
share of the top 10 per cent of income earners versus the rest or between them
and the bottom 10 per cent. Sometimes the focus is on the top 1 or even 0.1 per
cent. In recent years, those at the very top of the income scale have increased
their share. Rising inequality sparked
the creation of the Occupy Wall Street movement in the United States, which
used the slogan “we are the 99 per cent”.

Changes over time reveal whether inequality (as per the
measurement) is increasing or decreasing. In OECD countries, income inequality
has been increasing over the past 30 years and in some countries, it has
reached historic highs. In the 1980s, the richest 10 per cent earned 7 times
the poorest 10 per cent. In the 1990s, it was 8 times and in the 2000s it was 9
times. Today the ratio between earnings of the richest 10 per cent is 9.6 times
the earnings of the poorest 10 per cent. Inequality increased in the good
economic times before the crisis and
in the bad times afterwards. As the OECD points out:

Much of the recent debate surrounding inequality has focused on
top earners, especially the “top 1%”. Less well understood is the relative
decline of low earners and low-income households – not just the bottom 10% but
the lowest 40%.[6]

Measuring income
inequality, however, only gives us a partial understanding of economic
inequality. To get a more accurate picture we need to supplement income data with an analysis of wealth inequality.

Thomas Piketty’s basic contention is that wealth has consistently
grown faster than economic output since the industrial revolution, with the
exception of the first three-quarters of the twentieth century. The
relationship between wealth and growth is captured by the expression r > g, where r is the rate of return
on capital (wealth) and g is the rate of economic growth. If the rate of return
on capital (r) continues to outpace economic growth (g) then countries will
continue to become more unequal. According to the OECD, “wealth distribution is much more
concentrated than the income distribution".

On average, the top 10% (of households)
accounts for about 50% of total household wealth, while the top 10% (of
individuals) accounts for about 25% of total household income.”[7]
Wealth is often very concentrated in the top 1 per cent and especially the top
0.1 per cent of the income distribution. The top 1 per cent in OECD countries
own 18 per cent of total wealth, while the bottom 60 per cent owns 13 per cent
of total household wealth. High income and wealth shares for the top of the
income distribution are common across all countries, but in recent years, rapid
growth in many developing countries has seen the middle increase their share.

The Developed and
Developing World

From the
beginning of the industrial revolution, inequality between countries increased
enormously. This phenomenon is often called the “great divergence”, with Europe
and then the United States increasing their share of world output at the
expense of Asia.[8] As chart 1 shows, since 1950 and
especially since the 1990s, the world has experienced a great re-convergence.
While inequalities between countries are still very large, they are decreasing.

The
economic rise of China and India has had an enormous impact on global income
distribution and poverty reduction. In China, for example, 660 million people
have been raised from poverty. According to the World Bank, “income per
capita increased from $320 in 1980 to about $5,500 in 2012, and the number of
people living on less than $1.25 a day declined from 85 percent of the
population in 1980 to 11 percent by 2012”.[9] This poverty reduction, however, occurred alongside significant
increases in inequality. China has
gone from one of the most equal societies in the world to one of the most
unequal. Such a contention exposes the contradictions between economic growth,
poverty and inequality. Despite the problems associated with rapid growth, such
as environmental damage, it would be hard to make a case that China was better
off in the past with less inequality, but more poverty. Over coming years,
however, increasing inequality will no doubt create rising tensions China if it
is not addressed.

To assess
the progress or otherwise of developing and developed countries, we can measure
inequality within countries, between countries, or by considering the
world as a single entity. If we imagine
the world as one country and assess people’s income as individuals rather than as
country averages, we get a better idea about real global inequality. If
measured in this way, it appears that global inequality (measured by the Gini
coefficient) went into decline between 2002 and 2008. It is too soon to tell what
the long-term impact of the global economic crisis will be and whether this
decline will continue, but if so it would be the first time since the
industrial revolution that global inequality has declined.[10]

We should
acknowledge, however, that the world is still a fundamentally unequal place and
the small improvement in recent years does not change this fact. The Gini
coefficient for the world is about 0.7. According to Milanovic:

One way to look at it is to take the whole income of the world
and divide it into two halves: the richest 8 per cent will take one half and
the other 92 per cent of the population will take another half. So, it is a
92–8 world. Applying the same type of division to the US income, the numbers
are 78 and 22. Or using Germany, the numbers are 71 and 29 … Global inequality
is much greater than inequality within any individual country.[11]

Over the 20 year period from 1988 to 2008 the global poor
from developing countries experienced considerable income growth, with the new
‘middle classes’ of Asia doing particularly well. The biggest losers have been
the working and lower middle classes in the developed world.[12]
Chart 2 shows the growth of income for all percentiles of the global income
distribution from 1988-2008. Growth has been strongest in the middle (e.g. the
Chinese middle class) and the very top (e.g. the rich in the developed world).
Those at the 80th percentile of the global income redistribution (e.g.
the lower middle class in the United States) have experienced the least growth.
As Milanovic points out: “It is between the 50th and 60th percentiles of global
income distribution that we find some 200 million Chinese, 90 million Indians
and about 30 million people each from Indonesia, Brazil and Egypt.”[13]
Many Africans – represented by the bottom 5 per cent of the distribution – have
missed out on these improvements.

Chart 2

Real Income Growth at Various Percentiles of Global Income Distribution

The very rich in the developed world have experienced the
biggest growth in income as chart 3 shows. More than 50 per cent of the
increases in income between 1988 and 2008 went to the top 5 per cent of the
global income distribution.

Australia

The very rich have increased their share in Australia as
well. According to Atkinson and Morelli, the share of total wealth of the top 1
per cent in Australia was 34 per cent in 1915, falling to 6.3 per cent in 1968,
and rising again to 16 per cent in 2006. After the GFC, their share fell to
11.4 per cent. With the increase in
asset prices since 2010, it is probable that the share has risen once again.
The income share of the top 1 and top 0.1 per cent in Australia has grown in
recent years after declining for most of the twentieth century. In the United
States, top income shares have grown more than twice as large as Australia.

Australia’s Gini coefficient shows that inequality has
worsened since the 1980s. On most measures of inequality and poverty, outcomes
have deteriorated. Australia avoided the
worst effects of the economic downturn following the global financial crisis
and, consequently, inequality has not risen in Australia as much as it has in
many other developed countries. In
countries hardest hit by the crisis, poorer households experienced substantial
falls in income, with rising unemployment a major factor. In Australia, employment
has remained high and the poor have increased their incomes. In the United
States, stagnating incomes for the majority of the income distribution have
accompanied rising inequality. In Greece, while inequality has slightly
declined, so too have living standards for all parts of the income distribution.
To get an indication of progress, therefore, we need to consider living
standards as well as inequality. [14]

The major factors restricting the growth of inequality in
Australia in recent years have been the long period of growth and government
redistribution through taxing and spending. As argued above, analyses of
inequality and poverty must include the impact of public services or so-called
non-cash benefits. They also need to consider the impact of regressive indirect
taxes such as the GST. While governments have tightly targeted direct
government assistance to the unemployed in Australia, the significant rise in
family payments has meant that wealthier families have increased their share of
government redistribution. Wealth in Australia benefits from low levels of taxation,
which helps to entrench inequality. There are no capital gains taxes on the
family home or any wealth or inheritance taxes, and there are generous tax concessions
for wealthy superannuants, property owners and investors.

Conclusion

For most people’s lived experiences,
what matters most is within country inequality, rather than global inequality.
For developed countries, growing inequality could lead to growing
dissatisfaction with economic globalisation. While globalisation brings many
benefits, it must create benefits for the poor and the middle if it is to be
sustainable over the longer term. Reactions against globalisation in the major
developed economies could lead to protectionism and xenophobia.

The question for the future is whether growing inequality in
the developed world is inevitable. Analysing the differences in inequality
between countries at similar levels of development shows that politics and
policy can and do make a difference. Governments and societies that aim to do
something about inequality generally achieve better outcomes than those that
believe that the costs of lowering inequalities come at the cost of economic
growth and productivity.[15]

Contrary to the arguments of many economic liberals,
globalisation and the pursuit of economic growth do not undermine the ability
of governments to promote egalitarianism; instead, egalitarianism helps to
support a globalising, dynamic economy. As Peter Lindert points out in his
authoritative two volume study on social spending and economic growth since the
eighteenth century:

There is no clear net cost to the welfare state, either in our
first glance at the raw numbers or in deeper statistical analyses that hold
many other things equal … It turns out there are many good reasons why
radically different approaches to the welfare state have little or no net
difference in their economic costs. Those reasons … boil down to a unified
logic: Electoral democracy, for all its messiness and clumsiness, keeps the
costs of either too much welfare or too little under control.[16]

Lindert also points out that ‘the history of economic growth
is unkind’ to those with a suspicion that higher taxes and social spending are
bad for productivity. Beyond this basic fact is another unpleasant one for
those who argue that the welfare state must be cut in the interests of growth
or productivity: ‘people in the countries with higher social budgets get to
enjoy more free time every year and retire earlier’.Well educated, healthy workers are more
productive workers. Parents with access to childcare and leave can continue
careers sooner or later and maintain their productivity. Providing even more
options in this area enhances the productivity of a large section of the
population with parental responsibilities.

Australia’s
vulnerabilities and the need to improve social outcomes should not encourage a shift
away from globalisation towards protectionism. Far from it. Globalisation,
liberalisation and engagement with Asia have
increased prosperity. Sustaining these benefits, however, requires governments to
increase opportunities, spread the benefits of prosperity, and share the costs
of adaptation. In sum, maintaining support for openness requires governments and societies to do something about inequality.

[5]
OECD or Organisation for Economic
Cooperation and Development is a grouping of 34 countries committed to
democracy and free markets. It is often used as a description of developed or
advanced countries, although it also includes emerging economies such as
Mexico, Chile and Turkey. See OECD <http://www.oecd.org/about/membersandpartners/>.

2 comments:

While the measure of inequality using the GINI coefficient is useful and also be informative, such measure also has significant shortcomings particularly in a dynamic sense and a more comprehensive measure to reflect both or some complementing measures may be needed. To capture some of the shortcomings of the Gini coefficient measure, one can ask the following question:Do you wish to be 1% better off in a world/country of falling Gini coefficient where the average growth is less than 1%, or do you wish to be 5% better off in a world/country of rising Gini coefficient where the average growth is greater than 5%?I think most people are likely to prefer to be in the second situation as opposed to the first one.If my proposition/supposition is correct, that means to simply use the Gini coefficient is problematic and we need to develop another measure to better reflect that. I would suggest we need some measure of inequality that also captures the dynamic growth in it. It should not be too difficult to develop such a new measure to better the current simple Gini coefficient.